Eric K. Clemons, Nehal Madhani (Forthcoming), Regulation of Digital Businesses with Natural Monopolies or Third Party Payment Business Models: Antitrust Lessons from the Analysis of Google, Journal of Management Information Systems

Eric K. Clemons, Nehal Madhani (Forthcoming), Regulation of Digital Businesses with Natural Monopolies or Third Party Payment Business Models: Antitrust Lessons from the Analysis of Google, Journal of Management Information Systems

The resource-based perspective on firm diversification, subsequent to Penrose (1959), has focused primarily on the fungibility of resources across domains. We make a clear analytical distinction between scale-free capabilities and those that are subject to opportunity costs and must be allocated to one use or another, thereby shifting the discourse back to Penrose’s original argument regarding the stock of organizational capabilities. The existence of resources and capabilities that must be allocated across alternative uses implies that profit-maximizing diversification decisions should be based upon the opportunity cost of their use in one domain or another. This opportunity cost logic provides a rational explanation for the divergence between total profits and profit margins. Firms make profit-maximizing decisions to increase total profit via diversification when the industries in which they are currently competing become relatively mature. Due to the spreading of these capabilities across more segments, we may observe that firms' profit-maximizing diversification actions lead to total profit growth but lower average returns. The model provides an alternative explanation for empirical observations regarding the diversification discount. The self-selection effect noted in recent work in corporate finance may not be indicative of inferior capabilities of diversifying firms but of the limited opportunity contexts in which these firms are operating.

The Behavioral Theory of the Firm has had an enormous influence on organizational theory, strategic management, and neighboring fields of socio-scientific inquiry. Its central concepts have become foundational to any theoretical and empirical work focused on organizational phenomena. Unlike past reviews of this work, we start by focusing less on reviewing these concepts than we do on discussing the new agenda they created for students of organizations and related subjects. We then explain the theoretical commitments implied by its agenda before we trace and evaluate progress on a set of research issues inspired by its agenda: cognition, performance feedback, politics, attention, learning, and adaptation. Finally, we offer a broader assessment of the theory by looking both at original ideas that have seen less developments and at modern developments in the field that deserve to be incorporated into the Behavioral Theory of the Firm. In the open-system spirit of the Behavioral Theory of the Firm, we conclude that its agenda will continue to benefit from work both by its closest adherents and by work in related research traditions.